The era of cheap oil is over. Instead of hoping for lower gas prices, buy an electric vehicle.

Source: By Chris Tomlinson, Houston Chronicle • Posted: Sunday, May 22, 2022

Diego Davalos, owner of Houston Affordable Movers, fills his reserve tank with diesel Monday, May 16, 2022 in Houston. Diesel prices are at record-breaking highs, forcing truckers, farmers and fishermen to raise prices and scale back their operations to recoup costs. Some, like Davalos, have lost business as they raise prices to cover soaring transportation costs.
Diego Davalos, owner of Houston Affordable Movers, fills his reserve tank with diesel Monday, May 16, 2022 in Houston. Diesel prices are at record-breaking highs, forcing truckers, farmers and fishermen to raise prices and scale back their operations to recoup costs. Some, like Davalos, have lost business as they raise prices to cover soaring transportation costs. Brett Coomer, Houston Chronicle / Staff photographer

Abandon all hope ye who pray for lower gasoline prices.

The world has plenty of oil, but the companies and nations that pump crude have no reason to sell it for less. An international cartel controls the cheapest oil, and the corporations that control the rest cannot compete below current prices of $100 a barrel or more.

The days of cheap energy are over, at least until we all drive electric vehicles.

Most of the world’s crude oil comes from corrupt democracies or authoritarian dictatorships, some of which market themselves as monarchies. These governments rely on oil companies owned by the government to remain in power.

Many members of the Organization of the Petroleum Exporting Countries can produce oil for less than $20 a barrel but paying brutal security forces and operating luxury yachts gets expensive. They need prices above $85 a barrel to keep angry mobs off the streets and their crews from mutiny.

Petro-dictators are also becoming more united. Saudi Arabian Crown Prince Mohammed Bin Salman’s new alliance with Russian President Vladimir Putin comes as no surprise after the free world shunned them for exporting their oppression. The prince shattered the kingdom’s oil-for-security deal with the U.S. by ignoring President Joe Biden’s call for more production.

U.S. companies can produce more, but shale oil from fracked wells has always been expensive. Prices only dropped in 2014 because OPEC flooded the market to push U.S. oil off the market. Until Russia-aligned OPEC leaders feel pressured to defend their market share, they are happy to enjoy the windfall.

Foreign producers know well that U.S. competition is not coming anytime soon. Drilling costs are higher, laborers want better pay, and freedom-loving people refuse to finance Putin’s war crimes.

American oil companies are making a killing right now, but that’s because they have not been drilling, only emptying storage tanks. Inflation has hit every link in the supply chain and sinking more wells will be expensive.

President Joe Biden is not to blame, no matter what the oil lobbyists say. Neither an increase in government leasing nor a lightening of federal regulation will make a difference within the next two years. The economics of oil is the problem.

Since 2015, more than 600 oil exploration and production, oil-field service, and pipeline companies have filed for bankruptcy, bringing more than $321 billion in debt to court, according to Haynes and Boone, a Dallas-based law firm that tracks oil and gas bankruptcies.

Investors lost hundreds of billions because oil companies sold oil for more than it cost to produce. Today, investors insist management teams keep production low and return profits to them. Publicly traded companies that follow these orders, like Exxon Mobil, have seen stock prices jump over the last six months.

Geology, though, is the more significant problem. Top-tier reservoirs are getting harder to find, and so are good workers since many swore off the oil patch after the last bust. International tariffs have made steel pipe more expensive, and remember, it takes a lot of expensive diesel fuel to drill a well.

Higher oil prices will lead to additional U.S. production but not enough to lower prices because input costs and demand have also grown, the U.S. Energy Information Administration said earlier this month.

“A high level of uncertainty remains in our outlooks, but we have consistently forecast that elevated crude oil prices would help drive record-level annual U.S. oil production levels in 2023,” said EIA Administrator Joe DeCarolis. “Low global oil inventories coupled with continued high demand for gasoline, diesel, and other petroleum products means that increased production likely won’t have much impact on prices in the short term.”

Gasoline producers have plenty of reasons to keep prices at $4 a gallon. There are few potential catalysts to drive them lower.

OPEC and oil companies could over-produce again, as they did in 2014. But that was a price war for market share that caused widespread financial losses for everyone involved. The war in Ukraine, meanwhile, means traders will use any additional supply to reduce reliance on Russian exports, not bring down prices.

Demand could also drop. High fuel prices hit low-income working people especially hard, and many will drive less to save money. High fuel prices also increase the costs of all goods, which slows economic activity.

Combined with the Federal Reserve making loans more expensive, high fuel prices can cause a recession, which would send demand and prices down.

The third option is substitution. Consumers can buy electric vehicles, which are cheaper to own at these gas prices. If that happens in large enough numbers, few of us will care what gasoline costs.

Have you checked out the Ford F-150 Lightning yet?

Chris Tomlinson writes commentary about business, economics and politics.

twitter.com/cltomlinson

chris.tomlinson@chron.com

|